Followers

Friday, January 9, 2009

A major reason car sales have tanked in recent months is the sharp rise in unemployment. Folks who are worried about losing their jobs aren’t likely to take on the added risk of a five-year car loan.

Hyundai Motor America unveiled a novel approach to the problem over the weekend. Dubbed the Hyundai Assurance Program, the South Korean automaker said that people who finance or lease a new Hyundai during the next 12 months can return the car if they “experience an involuntary loss of income” within one year of the purchase date.

“That’s a new one,” said Erich Merkle, an industry analyst with consulting firm Crowe Horwath in Grand Rapids, Mich. “It’s an indication of the very tough sales environment right now.”

* UPDATE Hyundai, a relatively small player in the U.S. market with a 3% share in 2008, today reported a 48% drop in December sales with a year earlier — one of the worst showings among automakers.

Hyundai said it would absorb up to $7,500 in negative equity (the difference between what a vehicle is worth and what is owed on it) for buyers who opt to walk away from their loans. Customers who pay cash for their vehicles don't qualify for the program.

Depreciation can reduce a new car’s value by 25% or more during the first year of ownership. But since Hyundai’s lineup skews toward low- and moderately priced cars, the amount should be enough to cover the lost value on most Hyundai vehicles, save for the top-of-the-line Genesis sedan, which has a starting sticker price of around $32,000, and the Veracruz SUV.

According to a Hyundai press release, buyers can return a vehicle for no additional charge within 12 months of purchase if any of the following occur:

To qualify, the buyer must have made at least two scheduled payments on the loan or lease and be current on the payments, as well as pay the amount over the $7,500 negative-equity threshold. The value of the vehicle will be determined by the dealer, who will be allowed to re-sell the vehicle, Hyundai said. Returning the car shouldn’t have a negative impact on the customer’s credit, the automaker said.

* UPDATE Steven Schwartz, finance director at Keyes Hyundai in Van Nuys, said his dealership received a few calls today inquiring about the promotion, although it hadn’t generated any new sales yet.

Here’s an example from Schwartz of how the return program works:

A customer buys a 2008 Santa Fe SUV and gets a five-year loan for the total purchase price of $22,300 (including rebates, taxes etc.). About $350 of the $430 monthly payment goes toward paying the principal on the loan. When they buyer loses his job nine months later and returns the vehicle to Hyundai, he’s paid about $3,200 in principal on the loan and still owes $19,100.

Assuming the used Santa Fe is appraised at $16,000, the buyer would be “under water” on his loan by $3,100 — easily within the $7,500 negative-equity threshold provided by Hyundai.

Hyundai rolled out the new offer with an ad blitz during the weekend’s NFL playoff games, tapping into the national economic angst with the tag line “We’re all in this together and we’ll get through it together.”

“We understand consumers’ hesitance to commit to large purchases in today’s economic environment,” John Krafcik, acting CEO of Fountain Valley-based Hyundai Motor America, said in a statement.

While the shortage of credit for auto loans has gotten much of the blame for the plunge in sales, rising corporate layoffs and plummeting consumer confidence have also played a major role. That has spooked consumers and turned showrooms into ghost towns.

“People who are already laid off aren’t buying new cars anyway,” Merkle said. “The real hurdle for automakers is that a lot of people who are still employed are delaying purchases because of uncertainty about losing their jobs. [Hyundai] is trying to remove that uncertainty.”

It’s not clear whether other car companies will follow Hyundai's lead. Automakers and dealers are already offering a raft of incentives — 0% financing, cash rebates, even two-for-one sales — in an effort to get vehicles off their lots. In the latest indication of their plight, the automakers today are announcing major declines in December sales, with Ford, Honda and Toyota all reporting drops of more than 30% compared with a year earlier.

Hyundai is no stranger to aggressive promotions. The 10-year, 100,000-mile warranty it introduced a decade ago helped overcome concerns about the reliability of Hyundai’s vehicles.

“Hyundai has a history of making unprecedented moves when necessary to try to get people into the showrooms,” said Karl Brauer, editor in chief at Edmunds.com.